A commentary on insurance coverage issues in Hawaii and beyond

March 2013

March 27, 2013

The Fifth Circuit found that Transocean's policies, not the indemnity provisions of Transocean's and BP's drilling contract, controlled the extent to which BP was covered as an additional insured for its operations under the drilling contract. Ranger Ins., Ltd v. Transocean Offshore Deepwater Drilling, Inc., 2013 U.S. App. Ct. LEXIS 4512 (5th Cir. March 1, 2013).

BP and Transocean entered a drilling contract for exploratory drilling activities at the Macondo Well in the Gulf of Mexico. The contract required Transocean to maintain certain minimum insurance coverage for the benefit of BP.

Transocean had primary coverage and excess coverage. The policies defined "Insured" as including the Named Insured, other parties, and "any person or entity to whom the "Insured" is obligated by . . . "Insured Contract" . . . entered into before any relevant "Occurrence" to provide insurance such as is afforded by this Policy. . . ." "Insured Contract" was defined as any agreement "entered into by the 'Insured' . . . and pertaining to business under which the "insured" assumes the tort liability of any other party to pay for "Bodily Injury" or "Property Damage."

Meanwhile, the Drilling Contract required Transocean to "maintain insurance covering the operations to be performed under the Contract as set forth in Exhibit C. Exhibit C required that BP "shall be named as additional insureds in each of [Transocean's] policies, except Workers' Compensation for liabilities assumed by [Transocean] under the terms of this Contract."

Following the explosion of the Deep Water Horizon, BP sought coverage from Transocean's insurers. The insurers filed for declaratory judgment against BP. The district court reasoned that the Drilling Contract only required Transocean to name BP as an insured for liabilities Transocean explicitly assumed under the contract. The court then looked to the Drilling Contract to conclude that BP was not covered under Transocean's policies for the pollution-related liabilities deriving from the accident because the pollution originated below the surface of the water. The Drilling Contract only provided that liability would be assumed for pollution originating on or above the surface of the water.

Looking to Texas law, the Fifth Circuit found that only the policy itself may establish limits upon the extent to which an additional insured was covered. BP was not seeking indemnity from Transocean, but was seeking coverage from the insurers. The policy did not contain any limitation on additional insured coverage nor incorporate any limits from the underlying Drilling Contract.

The court next considered whether the insurance provision and the indemnity clauses in the Drilling Contract were separate and independent. The provision in the Drilling Contract extending direct insured status to BP was separate and independent from BP's agreement to forgo contractual indemnity in various other circumstances. Therefore, BP was entitled to coverage under each of Transocean's policies as an additional insured.

The insured, R.I. Pools, employed outside companies to supply concrete and to shoot the concrete into the ground. During the summer of 2006, it obtained its concrete from one subcontractor and used another to shoot the concrete. In 2009, nineteen customers of R.I. Pools from 2006 complained damage to their pools, including cracking, flaking, and deteriorating concrete.

Scottsdale sought a declaratory judgment against R.I. Pools that it had no obligations under the policy to defend or indemnify for claims related to cracks in the pools. The district court granted the insurer's motion for summary judgment, reasoning that the defects in the insured's workmanship could not be considered "accidents." The court also ordered R.I. Pools to reimburse the Scottsdale for defense costs already expended.

The Second Circuit disagreed with this result. The policy included defects in the insured's own work within the category of an "occurrence." The district court read the subcontractor exception to the "Your Work" exclusion out of the policy. The judgment was therefore vacated and the case remanded for consideration of the subcontractor exception.

The district court also erred in granting reimbursement to the insurer. Because the duty to defend existed up until the point at which it was legally determined that there was no possibility for coverage, the insurer had not shown entitlement to any reimbursement for defense costs.

March 20, 2013

Unable to discern the meaning of a provision stating that payment of damages would be made "through a trial but not any appeal", the court found an ambiguity. Parker v. Am. Family Ins. Co., 2013 U.S. Dist. LEXIS 9085 (D. Ore. Jan. 23, 2013).

The homeowners sued the general contractor for defective construction of their home. In November 2008, the homeowners reached a settlement through mediation with the general contractor. The general contractor's claims under its policies with American Family and Mid-Continent were assigned to the homeowners.

The homeowners then sued both insurers for breach of insurance contract and/or equitable contribution. American Family moved for summary judgment, claiming the homeowners did not prove their damages claim against the general contractor "through a trial but not any appeal." The court found the phrase ambiguous because it alternatively could mean (1) the homeowners must resolve all claims against subcontractors by means of a trial, as opposed to settlement or (2) the homeowners were required only to resolve all claims against subcontractors at the trial court level before suing the insurers. Both meanings were plausible, and the ambiguity was construed against American Family.

American Family also argued that the "owned-property" exclusion barred coverage because the general contractor had the right to possession of the property and home until the homeowners purchased the property on July 25, 2005. American Family argued the owned-property exclusion that was in effect until June 1, 2005, excluded property damage coverage that occurred on or before that date. The court agreed. The issue was whether the general contractor was protected under the policy for losses it caused to its own property while construction the house it built. Under this reasoning, the owned-property exclusion barred coverage. American Family was granted summary judgment on this issue.

Finally, Mid-Continent also moved for summary judgment based upon the anti-assignment provision in its policy. The court agreed that the assignment of claims against insurers was invalid under Oregon law.

Big-D was the general contractor for a remodeling project of International Gaming Technologies' (IGT) building. Big-D subcontracted with Take it for Granite Too (TIFGT) to install various tiling and stonework on the interior and exterior of the building.

After TIFGT began its stonework, a stone tile fill from an exterior wall. Over the next several months and after completion of TIFGT's work, two additional stones fell from exterior walls. IGT directed Big-D to replace TIFGT's stonework on the walls. Big-D notified TIFGT and requested that it make immediate repairs. TIFGT did not respond and eventually went out of business.

Experts opined that the cause of the stones falling was efflorescence between the tile and the wall. Efflorescence occurred when the stone started to deteriorate, spall, and become soft. It was caused by water entering through an open joint and getting behind the stone tile. Experts further decided that the tiles failed because the installers did not apply the thin-set mortar adhesive properly. The only way to remedy the deficiency was to remove and replace all of the tiles.

Big-D sued TIFGT and its insurers, Nautilus and Century. The two insurers moved for summary judgment, arguing their liability policies did not cover Big-D's damages for various reasons. Further, they argued their handling of claims did not amount to bad faith.

The insurers argued there was no occurrence or property damage under their policies. Faulty or poor workmanship installing the stone tiles was not an accident, and therefore not an "occurrence." The court predicted that the Nevada Supreme Court would find faulty workmanship was not itself an occurrence. However, the Nevada Supreme Court would likely find that an unexpected happening caused by faulty workmanship could be an occurrence. Thus, the events of the three stone tiles falling from the building were unexpected, unforeseen, and unintended, and came within the meaning of accident. Each stone that fell was an occurrence under the policies.

Further, the actual stone tiles that fell from the building and hit the ground were physically injured. Damage to each stone tile that fell was property damage. Additionally, the safety measures taken to prevent future property damage or bodily injury caused by the falling stone tiles were property damage. This included removal, scaffolding, and any other safety measures. Big-D also presented evidence that the stucco substrate was physically injured upon the removal of the stone tiles, and was also property damage caused by the stone tiles falling.

The court further held that loss of use of the front entrance of the building was property damage.

Finally, the water damage to the other subcontractor work was property damage. The occurrence was the water migrating under the stone tiles. If this caused physical injury to the other subcontractor's work, there would be covered property damage. There was evidence that water had migrated under the stonework and pockets of efflorescence formed between the stone tiles and the substrate.

Turning to the bad faith issue, there were genuine issues of material fact as to whether the insurers acknowledged and acted promptly to address and resolve the claim, and to provide a reasonable explanation of the basis for denial of the claim. Consequently, the insurers' motions for summary judgment were largely denied.

Several years after their house was constructed, the insureds discovered water damage. Chubb denied the claim. The insureds sued. Chubb moved for summary judgment and argued that the loss first manifested many years after its policy expired. Further, Chubb argued that Wisconsin followed the manifestation trigger for first-party property insurance, meaning that only the insurance policy in effect when the loss manifested was required to respond.

Chubb's motion was denied. There was no state court precedent applying the manifestation trigger to first-party property cases. The court refused to go out on a limb and recognize a theory not yet observed by Wisconsin state courts.

Chubb also moved for summary judgment on the insureds' count for bad faith because the claims were "fairly debatable." On the current record, the court was unable to conclude that the claims presented particularly complex facts and circumstances outside the common knowledge and ordinary experience of an average juror. Therefore, the motion for summary judgment was denied.

The insured's van was stolen. Inside the van was a large collection of work tools. The insured submitted a claim for loss of the tools under his homeowner's policy. He told Allstate the tools were worth between $20,000 and $25,000, and that they were for his personal use, although they could be used for work.

Over the next few months, the insured failed to provide requested documentation despite several written requests from Allstate. Allstate made several attempts to schedule an Examination Under Oath (EUO) and produce documents, but the EUO was never conducted and documents were not produced. Finally, Allstate denied the claim. Three and a half months later, the insured's attorney wrote Allstate, stating his client would appear for the EUO if Allstate would agree to extend the contractual time limit for filing suit. Allstate rejected the offer.

The insured sued, but the trial court granted summary judgment to Allstate.

The Washington Supreme Court reversed. There were factual issues regarding whether the insured substantially complied with Allstate's request for an EUO. The insured did appear for two scheduled interviews, giving Allstate ample time to examine him. He also agreed to appear for the EUO if Allstate would extend the deadline for filing suit. These facts created a genuine question of material fact as to whether the insured substantially complied with his duty to cooperate.

Thanks to John S. Vishneski III of Reed Smith LLP in Chicago for providing this case. The case was part of our panel discussion on bad faith issues at the recent ABA, Insurance Coverage Litigation Committee's annual seminar.

March 04, 2013

The Washington Supreme Court held that the arbitration provision in James Rivers' policy was unenforceable. State of Washington, Department of Transportation v. James River Ins. Co., 2013 Wash. LEXIS 66 (Wash. Jan. 17, 2013).

The Washington State Department of Transportation (WSDOT) was an additional insured on a policy issued by James River. When the WSDOT was sued for alleged negligence in causing traffic fatalities, it tendered to James River. The tender was accepted pursuant to a reservation of all rights under the policy.

James River attempted to initiate arbitration pursuant to the policy provision. WSDOT objected and flied a declaratory judgment action, seeking a declaration that the arbitration clause was void. The trial court granted WSDOT''s motion for summary judgment. The arbitration clause was barred by RCW 48.18.200, which prohibited insurance contracts from "depriving the courts of this state of the jurisdiction of action against the insurer." The trial court also found that the state statute was not preempted by the Federal Arbitration Act (FAA).

The Washington Supreme Court affirmed. The state statute demonstrated the legislature's intent to protect the right of policy holders to bring an original action against the insurer in the state courts. Assuring the right to review disputes between insurers and insured helped assure the protection of Washington law to Washington insureds as provided in the statute. Therefore, the statute was properly interpreted as a prohibition on binding arbitration agreements.

Because the statute prohibited binding arbitration agreements in insurance contracts, the court considered whether the McCarran-Ferguson Act shielded the statute from preemption by the FAA. The McCarran-Ferguson Act provided,in part, "No act of Congress shall be construed to invalidate, impair or supersede any law enacted by any State for the purpose of regulating the business of insurance . . . unless such Act specifically relates to the business of insurance . . . ." The Washington state statute prohibited binding arbitration agreements in insurance contracts. Therefore, the provision regulated the "business of insurance" because it was aimed at protecting the performance of an insurance contract by ensuring the right of the policyholder to bring an action in state court to enforce the contract. Consequently, the statute was shielded from preemption by the FAA under the McCarran-Ferguson Act.

The trial court was affirmed.

This case may have legs in Hawaii because Haw. Rev. Stat. 431:10-221 is identical to the statute that was at issue here before the Washington Supreme Court.